Registration Threshold for VAT and Corporate Tax:

Voluntary VAT Registration:

When taxable supplies or taxable expenses exceed AED 187,500 in the previous 12 months or expected to be in the next 30 days, voluntary registration is possible.

Mostly startups voluntary register for VAT who have significant input VAT and want to recover it.

Mandatory VAT Registration:

When taxable supplies +imports (rolling 12 months) exceed AED 375,000 or expected to exceed AED 375,000 in the next 30 days, it becomes mandatory to register for VAT.

What “counts” towards the thresholds:

It is important for compliance what should be considered while calculating registration thresholds. There are different rules for VAT and Corporate tax explained below:

VAT Registration Threshold-What counts?

UAE VAT registration thresholds are:

Mandatory registration: AED 375,000

Voluntary registration: AED 187,500

To determine if these thresholds are crossed, businesses calculate their taxable supplies over;

• The past 12 months and

• The next 30 days(expected)

Supplies included in VAT Threshold Calculation:

1-Taxable Supplies (5% standard rated):

All supplies of goods and services subject to standard 5% VAT rate.

Examples:

• Sales of goods

• Professional services

• Rental of commercial properties

• Management fees

• Trading activities

2-Zero rated supplies (0% VAT):

These supplies must be included in threshold even though VAT rate is 0%. These include:

• Export of goods

• Certain medicines or medical equipment

• International transportation

• Newly constructed residential property

• Education Services

• Precious metals under certain conditions

3-Reverse -charge imports of goods/services:

If a business imports goods or services where VAT is applied through reverse charge mechanism, their value counts towards registration threshold.

Examples:

• Import of consultancy services

• Import of software licenses

• Import of goods where importer becomes responsible for VAT

4-Deemed Supplies:

Some non-monetary supplies are treated as supplies for VAT purpose and it includes:

• Free samples given to customers

• Gifts to employees above FTA allowed limits

• Business assets used for personal purpose

• Disposal of business assets without consideration

5-Expenses subject to VAT (Voluntary registration only):

For AED 187,500 voluntary threshold, VAT-inclusive expenses are also taken into account such as:

• Office equipment

• Stock purchase

• Software or business tools

• Rent of commercial premises

• Services by taxable suppliers

• Supplies excluded from VAT Threshold Calculation:

1-Exempt supplies:

Exempt supplies cannot be taxed; therefore, they are excluded. These include:

• Residential property rent

• Local Passenger Transportation

• Life Insurance

• Bare land

• Certain financial services (margin based)

2-Non-business/Private Income:

• Personal income

• Dividends

• Salaries

• Passive income

3-Disbursements/Pure Reimbursements:

Disbursements are the payments that you make on behalf of the client. The cost actually belongs to the client and you act as an intermediary. As the cost actually does not belong to business, it is excluded from VAT registration threshold calculation.

For example, you run a business setup service and the client asks you to renew their trade license. Trade license cost is AED 10,000 and you pay it to the government. The receipt is in the client’s name and you later collect AED 10,000 back from the client.

4- Sale of Capital Assets:

Excluded unless selling stock-in-trade.

5-Income “not in the course of business”.

This refers to the income that is not directly related to business activity and therefore excluded towards VAT registration threshold.

Examples:

>>Salary/wages

Income earned as an employee working for a company. As this is not a business activity, it cannot be included in VAT calculation.

>>Personal Investment Income

Dividends from shares

Interest from savings

Capital gain on personal investment

Stock market gain

>>Rental Income from personal residential property

>>Inheritance/Gifts you receive

>>Selling personal assets

>>Lottery prizes/rewards/cash back

Corporate Tax Registration Threshold- (Who must register):

There is no income threshold for registering a company. The company must register even if it earns AED 0.

Only natural persons have threshold for registration. A Natural person must register if: total business turnover exceeds AED 1,000,000 per Gregorian year.

Corporate Tax-What counts toward the thresholds?

Under UAE corporate tax law, the threshold to determine the applicable tax rate is AED 375,000. The taxable income up to AED 375,000 is charged at 0% while income above AED 375,000 is subjected to 9% corporate tax.

The Threshold Applies to Taxable Income, Not Revenue:

The AED 375,000 threshold applies to taxable income (income left after deducting all allowable business expenses).

Its formula is:

Taxable income= Taxable Revenue – Deductible expenses

Income that counts towards threshold:

1-Normal business income:

This includes:

• Income from services, consultancy and professional work

• Sale of goods

• Commission and agency income

• Fee, subscription or operational service charges

2-Other Operating income:

This includes the income earned from the operations other than the main business line.For example:

• Rental income from business assets

• Government grants that are taxable

• Miscellaneous fee related to business activities

• Franchise income, royalty and license fee

3-Financial and Investment Income:

This includes:

• Interest income

• Gain on investment properties

• Fair value gains

4-Capital Gains:

This refers to the profit from the sale of long-term business assets:

• Sale of vehicle, machinery and equipment

• Sale of a business division

• Disposal of commercial property used in business

5-Income from foreign permanent establishments:

If the business does not elect for the exemption for foreign permanent establishments (PEs), that income must be added to taxable income.

6-Freezone businesses (Non qualifying income):

Free zone persons operating under 0% tax law must carefully analyze income. Non qualifying income is subjected to 9% tax. Qualifying Income remains taxed at 0%, but is still included in determining taxable income for reporting and assessment.

Income that does not count toward the threshold:

1-Exempt income:

The following are excluded from taxable income:

• Gain on sale of UAE company shares

• Dividend from UAE companies

• Qualifying foreign dividend

2-Unrealised Gains

3-Income already subject to Withholding Tax:

Income taxed under withholding tax rules does not affect corporate tax threshold calculations.

4-Personal income for Individuals with license:

For individuals running a licensed business:

Business income counts

Personal salary, personal rent or personal investment income is not included